Market Brief – Thursday 12/6/18

Stocks were pummeled out of the gate as a huge sell order came in yesterday when the futures market opened, which caused the major indices to open lower. In the past, large sell orders would be buffered by the securities dealers, but they aren’t doing that anymore. Welcome to a computer-traded market. Instead, the futures exchange was forced to pause the market every 10 seconds to deal with this large sale.

Stock market Bulls were once again forced to ‘buy the dip,’ as the major indices were trading near a major technical level, which if breached, could see a flood of selling. Most investors do not understand how much debt and leverage is sitting under this market that will lead to mass liquidations if stock prices continue to fall. At some point, the equity bulls will run out of money to prop the market up.

The Bulls were aided by a timely Wall Street Journal article which suggested the Fed may pause after the December rate hike. Due to the lags of monetary policy, any pause won’t matter. There is at least a one-year delay from when the Fed raises the Federal Funds rate and unwinds its balance sheet before the economy feels it. The stock market and economy are experiencing the tightening going back to the fourth quarter of 2017. All of the tightenings of 2018 has yet to hit the economy and when it does, stock market bulls will be powerless to stop it.

The Treasury-bond Bears were also forced to play defense today as 10-year Treasury yields hit a low of 2.826%, just above the major support line at 2.8%, which if breached, will see yields plummet. For the first time in more than a year, 30-year Treasury yields closed below their 200-day moving average.

The Department of Energy (DOE) reported crude inventories:

  • Crude -7.323mm (-2mm exp) – biggest crude draw since July
  • Cushing +1.729mm
  • Gasoline +1.699mm (+1.75mm exp)
  • Distillates +3.811mm

With refinery maintenance season mostly over, crude inventories are expected to fall. OPEC is expected to cut production, but the details are still unknown. Oil closed lower on the day.

Factory orders fell -2.1% MoM as the ISM Manufacturing survey rose. October’s Durable Goods orders fell -4.3% MoM. Clearly, the manufacturing survey is not reflecting lower demand.

Initial jobless claims hit a 5-month high as investors are hoping for a blowout Nonfarm payroll report tomorrow. Should this rising trend in jobless claims continue, it’s another indicator the economy has peaked. ADP reported +179k private-sector jobs were created in November, below expectations of 195k jobs created. ADP noted that “job growth has likely peaked.”

Adding insult to the trade war, our trade deficit with China hit a record high as it increased to $43.1 billion in October.